Chart of the week: China stocks cheapen in BRIC bloc

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China's new leaders face the challenge of reining in the dominance of state-owned enterprises that has helped drag stock valuations down the most among the so-called BRIC bloc - leading emerging market economies - in the past decade.

The chart of the week tracks the Shanghai Composite Index's price-to-earnings ratio against Morgan Stanley Capital International's (MSCI) global benchmark gauges for Brazil, Russia and India over 10 years. The Chinese measure's valuation has fallen 76 per cent to 11.4 times earnings to November, monthly data shows. The lower panel tracks China's market capitalisation of some US$2.8 trillion against the combined value from the three other nations, at about US$3.1 trillion.

Under President Hu Jintao, banks were directed to lend to local governments during the financial crisis to boost growth, while artificially low retail fuel prices have hurt oil refiners such as PetroChina. Industrial & Commercial Bank of China, the country's largest lender, trades near a record low of 5.7 times earnings.

"The overwhelming majority of listed companies in the stock market are state-owned whereas the most dynamic part of the economy is the private sector," says Andy Rothman, China macro strategist for CLSA Asia-Pacific Markets in Shanghai. "You have a market making it difficult for investors to participate in the growth." China's economy expanded at an annual average of 10.6 per cent over the past decade to become half the size of the US'.

The Shanghai Composite rose 36 per cent during the 10 years through November 9, compared with rallies of between 177 per cent and 623 per cent by MSCI's equity indexes for Brazil, Russia and India. Mainland Chinese are barred from directly trading overseas shares, including those on the MSCI China Index.